Profits at All Costs: Shareholder Value Vs Stakeholder Value

At one time, most American companies saw their role as being responsible to its stakeholders, i.e., being a good corporate citizen and taking care of both its stockholders and its workers. There was a change in the 1980′s toward increasing shareholder value, i.e., a shift toward considering the companies’ profits to be primary even if it hurt the rest of its stakeholders. The graph at the right shows how that change affected our economy. Corporate profits increased, CEO pay increased remarkably, and worker wages stagnated.Wal-Mart is a good example of that shift. As with many companies, the corporate culture changes when the founder dies. Sam Walton believed you should buy American and that you should treat workers fairly, a policy of maximizing stakeholder value. His heirs apparently thought that profits should be the main goal, a policy of maximizing shareholder value, and in the process making themselves fabulously wealthy. The company now imports many of their products and pays its workers poorly. Wal-Mart just announced that it may raise its minimum salary to $8.50 an hour. The Tulsa World editorial board approved saying,” If they (the workers) earn more, they will spend more, spurring the economy. They also will be less prone to need government entitlements such as food stamps.” True, and while the salary increase may sound generous, it really isn’t. In 2009, when the minimum wage was raised to $7.50, Wal-Mart stock was worth $50 a share. In 2014, workers still earn only $7.50, but the stock is now at $88. If wages had kept up with the stock price, the minimum wage worker would get $13.20.Corporate earnings are one of the most closely watched indicators of a company’s profitability. Stock prices reflect the companies earning or its potential for earnings. Wall Street likes it that way, as it boils a company’s value down to one number which can be measured or approximately estimated for the future. CEO salaries are closely tied to their stock’s performance, making increased shareholder value the primary goal of the company. This leads to policies which boost the company’s earnings and the CEO’s pay in the short term, even though it may hurt the company in the long term. That’s why most CEOs insist on Golden Parachutes which make them fabulously wealthy even if the company declines in the future. Rewarding CEO’s for increased profits had led to policies that created a huge pay gap. While in 1980 CEO earned 42 times as much as an average worker, that gap has grown to 354 times as much.Salaries are one of the biggest expenses for most companies, and keeping average employee salaries low increases profits. Announcing layoffs, though it may reduce a company’s future productivity, is often rewarded with an increase in stock price. Some companies resort to practices such as shifting earnings overseas, setting up tax havens, or ignoring safety and environmental regulations which would cost money to implement. These policies hurt the workers, damage the US economy, and sometimes shift a companies business expenses to the US taxpayer. Many companies justify these practices by saying that they are following the law, but we should not forget that many of the laws were made by politicians influenced by lobbyists and money. Even though they are following the law, the ethics and the patriotism of those companies are questionable.Though Wall Street and CEOs may profit from the focus on shareholder value, there are other stakeholders in the company who should be considered. Workers have a stake in the company as their well-being depends on it. Yet, low pay makes workers lives miserable and many of them must sacrifice time with their family in order to take a second job. Taxpayers also a have a stake in companies. Tax avoidance and tax havens reduce tax revenue and add to the national debt. Shifting jobs overseas hurts American worker’s buying power and reduces their contributions to income taxes. Workers who are unable to afford health insurance or enough food for their family are forced to apply for government assistance. This shifts the burden to taxpayers and the reduced purchasing power slows the economy. Cutting corners on safety means damage to worker’s lives and health and puts a burden on our healthcare and workmen’s compensation system. And, we are all stakeholders in the environment as clean air, pure water, and a hospitable environment are considered our birthright.The idea that corporations exist to reward shareholders arose not from law but from the work of ideologically driven economists. It’s a shift that Wall Street and corporate executives brought about, as they reap the rewards. They argue that shareholder capitalism will bring about the greatest good for our society, but in reality it is created economic inequality that is destroying the quality of life for a majority of American citizens. As a contrast, Germany has adopted an emphasis on stakeholder values. German corporation are required by law to have at least 50% of hourly workers on corporate boards. German workers are involved in decision about wages, healthcare, pensions, overtime, vacations, and other decisions that affect them. The workers certainly have an incentive to see that the company succeeds and they have more security and opportunity than ours. Germany has the strongest economy among the European Union countries and a much greater after tax economic equality.Socially responsible investors recognize the value of considering all the stakeholders in a company. Many retirement funds and investment firms have social choice investment funds. The fund’s investments favor companies that are strong stewards of the environment; devoted to serving local communities; committed to higher labor standards; dedicated to producing high-quality and safe products; and those managed in an exemplary or ethical manner. Though the funds are chosen for their ethical values, some of them do quite well. The TIAA-CREF Social Choice Equity Fund, for example, now has $2.6 billion in assets and has grown at the rate of 15% a year for the last five years. Socialist choice funds are often less volatile as they are more immune to the wild swings in stock prices that occur when earnings reports come out.Another factor driving the shift toward stakeholder investing is the choice by socially responsible institutions to divest from corporations which have a history of worker or environmental abuses. At its 2014 meeting in Geneva, the Central Committee of the World Council of Churches (WCC), a fellowship of over 300 churches which represent some 590 million people in 150 countries, endorsed fossil fuel divestment, agreeing to phase out its own holdings and it encouraged its members to do the same.Is not likely that the United States will pass laws requiring more emphasis on stakeholder values, but there is beginning to be a shift in that direction. There was recently an entrepreneurial seminar which promoted “Social entrepreneurism: the tricky balance of doing good while doing well”. It pointed out that twenty-seven states have passed legislation to make “for benefit corporations”, called B Corporations, possible. These are tax paying for-profit corporations which include an explicit social mission in their corporate charters. One example is Grameen Bank, an organization that popularized micro-credit, which makes small loans to impoverished families in developing countries so they can invest in small businesses. Its founder was recognized with a Nobel Prize. Another example is Ben & Jerry’s ice cream, with its explicit corporate emphasis on social causes, such as paying more for sustainably grown milk, sugar, eggs, vanilla and chocolate; curbing climate change; and mandatory labeling of genetically modified organisms. People are apparently willing to pay more for a product from companies that emphasize stakeholder values.(c) 2014 J.C. Moore

Analysis on China’s Blood Enrichment Products Market

Blood enrichment products possess some special characteristics in China’s healthcare market. Firstly, they are one of the most developed products in the Chinese healthcare market, as blood enrichment products have now been divided into two regulatory categories: medicine and health foods.Secondly, ingredients of blood enrichment products have three main categories, namely chemical compounds, generic food ingredients and Chinese herbs such as angelica and donkey-hide gelatin. Thirdly, due to constant marketing campaigns, people have now accepted that there are three types of blood enrichment products in terms of effectiveness: pure blood enrichment, blood and energy dual enrichment and female body strengthening.It can be said that China’s blood enrichment product market is a result of extensive consumer education in the last 10 more years. Currently, the medicine part of this market is worth approximately RMB 2 billion (US$ 260 million), while the health food part is about RMB 2 – 2.5 billion (US$ 260 – 330 million).Products In terms of blood enrichment products, the health food category has made better contributions to the industry so far. According to a survey in early 2006, there were about 600-700 blood enrichment food brands in China, with leading national players such as Red Heart King Group, Joincare Pharmaceutical Group, Hong Fu Loi International, Harbin Pharmaceutical Group Sixth Pharm Factory, Hengan Group and Yangshengtang Group, and tens of leading regional brands.The blood enrichment medicine segment was relatively less competitive compared to blood enrichment food segment. There were only a handful of serious national players, such as Dong-E E-Jiao Group, Jiuzhitang Group, Jilin Xiuzheng Pharmaceutical and Shandong Fujiao Group, and there were rarely any leading regional brands. Dong-E E-Jiao Group had been the dominant player in this market with 43% domestic market shares and 75% of export market shares for three consecutive years.Among blood enrichment medicines, donkey-ride gelatin-based products had been gaining more and more popularity, with more than 45% market shares in mid-2006.Prices Wholesale prices of blood enrichment products in China exhibited the following characteristics: health foods higher than medicines, oral liquids higher than syrups, branded products higher than non-branded products, and prescription products higher than OTC (over the counter) products.In terms of retail prices, there were also three distinctive characteristics. Firstly, branded products, despite their higher prices, had smaller profit margins than non-branded ones. For example, for the same donkey-ride gelatin-based oral liquids, products from Dong-E E-Jiao had a gross margin of only 20%, while products from the lesser-known Jiangxi Yuxin Pharmaceutical could reach 85%. Secondly, competition in the retail end was maturing, as manufacturers and distributors tended to achieve a rational balance between promotional expenditure and product pricing in many geographical regions. Thirdly, although blood enrichment products had originated from rural areas in the 1990s, amid the short-sighted competitive environment, currently there was a shortage of products that could satisfactorily meet the demand from rural populations.Retail competitionAs more than 80% of blood enrichment products were sold as OTC medicine in China, the real driving force in this market would be the competition among OTC outlets (mostly pharmacies). Survey statistics showed that among the top three factors that influenced consumers’ purchasing decision of blood enrichment products, “in-store recommendations” ranked the highest, followed by “doctor prescriptions” and “brand awareness” each with 21% respondents, and “previous experience” finished the last with 12% respondents.From the above statistics we could conclude that a product’s competitiveness was largely determined by its word-of-mouth recognition, which was in turn developed from factors including retail outlet development, in-store sales personnel, unique selling points of a product, packaging and promotional campaigns.Market strategy solutionsThe above analysis indicates that there are two major themes in the current blood enrichment product market: retail outlets and rural demand. These two themes could therefore form the basis for a company’s development breakthrough.Retail outlet strategiesRetail strategies have to be differentiating, emotional and communicative. Differentiating means product innovation and operational advantages, in order to achieve an optimal combination of performance, products and prices.An emotion-appealing marketing campaign is important for blood enrichment products, as their target purchasers are mostly female customers, who are relatively more emotional. Therefore, a detailed, considerate and comprehensive promotional campaign, coupled with effective execution, will be the key factors to secure good sales volume.A communicative strategy means companies have to establish long term relationships with their target customers, by means of regular and diversified communications and messages, so that consumers can improve their understanding of particular products and manufacturers.Promotions key to rural market operationsThe definition of rural market here also covers county-level markets (the third and fourth tier markets). Compared to urban market, rural market has the following three advantages. One is their better understanding of the danger of blood deficiency, due to their suboptimal nutritional intake. Rural consumers buy blood enrichment products not only for beauty purposes, but also for real blood supplementary purposes. The second advantage is that rural consumers typically have more “sheep mentality’ when it comes to consumption, easier to be manipulated by well-executed promotional campaigns. The last advantage is that in rural markets, promotions and sales activities are normally tied together, while companies may have to sink more marketing money to please the more cherry-picking metropolitan consumers.Distribution channels and promotional campaigns will be the keys for opening up the rural demand of blood enrichment products. It is important for a product manufacturer to partner with those commercial distribution companies with rural supply qualifications. And promotional campaign should not only be targeting end customers, but also grass root-level pharmacies and shops.